Trustee Fails to Recover Assets Transferred by Debtor’s Wholly Owned Corporation A Chapter 11 liquidation trustee sued to recover assets that were

Trustee Fails to Recover Assets Transferred by Debtor’s Wholly Owned Corporation A Chapter 11 liquidation trustee sued to recover assets that were

transferred post-petition by a corporation that was wholly owned by the debtor. Allegedly, the transfers were for the benefit of the debtor and

his family, as well as other businesses. The trustee raised several claims for relief, including avoidance of prepetition transfers, recovery of transfers for the benefit of the estate, and turnover of estate property under §§ 542, 549, 550, and 551 of the Bankruptcy Code. The complaint also included avoidance of actual and constructive fraudulent transfers under California law.

The debtor and the recipients of the transfers were named defendants.

The bankruptcy court dismissed all causes of action, concluding that the trustee could not plead that the assets were property of the estate. The trustee appealed to the 9^(th) Circuit BAP, which affirmed.

On appeal, the trustee raised three arguments in support of his contention that the assets were estate property: (1) the sale that preceded the transfers was a “Liquidation Event” which transformed the assets into the debtor’s personal assets; (2) the debtor’s total control of the corporation meant that he owned the corporation’s assets, and (3) the corporation was the debtor’s alter ego. The BAP disagreed with all three.

The first argument was rejected because, upon a liquidation event, the debtor had a claim against the corporation for distribution of the assets, not immediate ownership of them.

The second argument was almost a nonstarter, as the BAP noted that under California law a shareholder of a corporation, for that reason alone, does not own or have legal title to the assets of the corporation.

The last argument failed because, under California law, the alter ego doctrine imposes liability despite the corporate veil of separation, but it does not completely disregard the corporation’s existence. As applied to this case, the BAP concluded that the alter ego doctrine “would only serve to drill a hole in the corporate wall to transfer liability from the corporation to its shareholder, not to merge [the corporation’s] assets with [the shareholder’s].” Bankruptcy Trustee's Recovery Attempt Fails: Debtor's Wholly Owned Corporation Assets Unreachable In a Chapter 11 liquidation case, a trustee sought to recover assets transferred by a debtor's wholly owned corporation.

The trustee claimed these transfers benefited the debtor, his family, and other businesses, and raised several claims for relief under the Bankruptcy Code and California law.

The bankruptcy court dismissed all causes of action, ruling that the assets weren't part of the estate. The 9th Circuit BAP affirmed this decision. The trustee presented three arguments for considering the assets as estate property, all of which the BAP rejected.

Key takeaways include: 1. The debtor only had a claim against the corporation for asset distribution, not immediate ownership of the assets. 2. California law doesn't grant shareholders automatic ownership of corporate assets. 3.

The alter ego doctrine can transfer liability but doesn't merge the corporation's assets with the shareholder's.